Earned Income Credit - Who Qualifies for the Credit?

The Earned Income Credit - Who Qualifies for the Credit?

Originally approved by Congress in 1975, the Earned Income Credit (EIC) was introduced to reduce the tax burden on low- and moderate-income individuals. It is a refundable credit, so that if the credit is greater than the individual taxpayer’s tax liability, it results in a tax refund.

At one time, individuals with at least one qualifying child were able to receive Advance EIC payments in their paychecks, but on August 10, 2010, President Obama signed legislation that terminated the Advance EIC program. However, individuals may still claim the credit on their Form 1040 each year.

Who Qualifies for the Earned Income Credit?

According to IRS Publication 596, Earned Income Credit, there are certain qualifications that all individuals must meet in order to claim the credit, and there are specific qualifications for those with qualifying children or for those who do not have a qualifying child. All individual taxpayers must meet the following qualifications to claim the credit:

Have a valid Social Security number.
Filing status cannot be “Married, filing separately”.
Be a U.S. citizen or resident alien for the entire year.
Cannot file Form 2555 or Form 2555-EZ relating to foreign earned income.
Cannot be a qualifying child of another person.
Must have earned income.
Investment income must be less than a specific amount.
Adjusted Gross Income (AGI) must be less than a certain amount.
Earned income must be less than a certain amount.

The income limits mentioned in the last three qualifications are set each year by the IRS. For instance, according to the IRS website the limit on investment income for 2014 was $3,350, and the limit for 2015 is $3,400.

The limits on Adjusted Gross Income for 2014 were as follows:

With 3 or more qualifying children – $46,997 ($52,427 for married filing jointly)
With 2 qualifying children – $43,756 ($49,186 for married filing jointly)
With 1 qualifying child – $38,511 ($43,941 for married filing jointly)
With no qualifying child – $14,590 ($20,020 for married filing jointly)

An individual taxpayer’s AGI includes all income, including earned income, investment income, social security payments, etc. However, an individual must have earned income to qualify for the EIC, and the earned income cannot exceed the limits noted above. (The increased limits for 2015 can be located on the IRS website.)

If a individual does not have a qualifying child, then he must also meet the following qualifications:

Must be at least 25 years of age, but less than 65. (If married filing jointly only one spouse needs to meet the age requirement.)
Cannot be the dependent of another person.
Cannot be a qualifying child of another taxpayer.
Must have lived in the U.S. more than half of the year.

What Is a Qualifying Child for the EIC?

A child must meet four tests in order to be defined as a qualifying child. One point to remember is that a child does not have to be claimed as a dependent on the taxpayer’s return in order to be a qualifying child. For instance, in the case of an unmarried couple with a child, one parent may claim the child as a dependent, whereas the other parent may report the child as a qualifying child for EIC purposes.

The first test is the Relationship test. To be a qualifying child, the child must be related to the taxpayer as a son, daughter, stepchild, or a descendant of any of them (such as a grandchild), or be a brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them (such as a niece or nephew). An adopted child is always treated as a taxpayer’s child, and according to Publication 596, a foster child may meet the relationship test if “the child is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.”

The second test is the Age test. A child is a qualifying child if it meets any of the following tests:

The child is under age 19 on December 31 of the tax year, and the child is younger than the taxpayer (or the taxpayer’s spouse if married filing jointly).
If the child is a student, then the child must be under the age of 24 on December 31 of the tax year, and younger than the taxpayer (or the taxpayer’s spouse).
The child is permanently and totally disabled at any time during the year, regardless of age.

A qualifying child meets the Residency test if it lived with the taxpayer for more than half of the year.

The fourth test is the Joint Return test. If the child files his own tax return, he cannot file jointly unless the purpose of the joint return is to claim a refund.

In addition to the above tests, a qualifying child can be claimed for the EIC by only one taxpayer (or married couple) each year. The qualifying child’s social security number can only be reported on one Schedule EIC each tax year so that two taxpayers cannot claim the same child for the EIC.

Claiming the Earned Income Credit

Individuals or taxpayer’s with qualifying children should claim the EIC if they qualify. It has been estimated by some that hundreds of thousands of families who qualify for the credit never claim it. For instance, in 2010 a New America Foundation policy paper, entitled Left on the Table, estimated that in California alone over $1 billion in Earned Income Credits had been unclaimed.

The above article discusses who qualifies to claim the Earned Income Credit. The following article entitled The Earned Income Credit (EIC) – How Is It Calculated? discusses the actual mechanism used by the IRS to calculate the credit. The final article entitled The Earned Income Credit – How to Claim It on Form 1040 provides instructions on how the credit is claimed by qualified individuals.